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This website is maintained by WisdomTree Europe Ltd (registered number 08985846) with registered office at 3rd Floor, 31-41 Worship Street, London EC2A 2DX, United Kingdom. WisdomTree Europe Ltd is an appointed representative of Mirabella Advisers LLP which is authorised and regulated by the Financial Conduct Authority. Some of the contents of this website have been approved by Mirabella Advisers LLP.

This website is provided for your general information only and does not constitute investment advice or an offer to sell or the solicitation of an offer to buy any investment.

Nothing on this website is advice on the merits of any product or investment, nothing constitutes investment, legal, tax or any other advice nor is it to be relied on in making an investment decision. Prospective investors should obtain independent investment advice and inform themselves as to applicable legal requirements, exchange control regulations and taxes in their jurisdiction.

This website complies with the regulatory requirements of the United Kingdom. There may be laws in your country of nationality or residence or in the country from which you access this website which restrict the extent to which the website may be made available to you.

United States Persons

The information provided on this site is not directed to any United States person or any person in the United States, any state thereof, or any of its territories or possessions.

Persons accessing this website in the European Economic Area.

Access to this site is restricted to Non-U.S. Persons outside the United States within the meaning of Regulation S under the U.S. Securities Act of 1933, as amended (the "Securities Act"). Each person accessing this site, by so doing, acknowledges that: (1) it is not a U.S. person (within the meaning of Regulation S under the Securities Act) and is located outside the U.S. (within the meaning of Regulation S under the Securities Act); and (2) any securities described herein (A) have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state or other jurisdiction and (B) may not be offered, sold, pledged or otherwise transferred except to persons outside the U.S. in accordance with Regulation S under the Securities Act pursuant to the terms of such securities. None of the funds on this website are registered under the United States Investment Advisers Act of 1940, as amended (the "Advisers Act").

Exclusion of Liability

Certain documents made available on the website may have been prepared and issued by persons other than WisdomTree Europe Ltd. This includes any prospectus. WisdomTree Europe Ltd is not responsible in any way for the content of any such document. Except in those cases, the information on the website has been given in good faith and every effort has been made to ensure its accuracy. Nevertheless, WisdomTree Europe Ltd shall not be responsible for loss occasioned as a result of reliance placed on any part of the website and it makes no warranty as to the accuracy of any information or content on the website. The terms and conditions applicable to investors will be set out in the relevant prospectus, available on the website and should be read prior to making any investment.

Risk Warnings

You should always bear in mind that:

The investment performance of any security referred to on this website can be volatile and can go up or down and you can lose your entire investment.

Past performance is not an indication of future performance.

Rates of exchange may affect the value of investments.

Applications to invest in securities referred to on this website must only be made on the basis of the relevant prospectus.

Cookies

WisdomTree Europe Ltd may collect data about your computer, including, where available, your IP address, operating system and browser type, for system administration and other similar purposes. These are statistical data about users' browsing actions and patterns, and they do not identify any individual user of the website. This is achieved by the use of cookies. A cookie is a small file of letters and numbers that is put on your computer if you agree to accept it. By clicking 'I agree' below you are consenting to the use of cookies as described here. These cookies allow you to be distinguished from other users of the website, which helps WisdomTree Europe Ltd provide you with a better experience when you browse the website and also allows the website to be improved from time to time. Please note that you can adjust your browser settings to delete or block cookies, but you may not be able to access parts of our website without them.

The bullish conviction in European bonds is dissipating, while bank stocks are rallying. Blame Brexit, Trump’s US presidential win, Italy’s “no” referendum on constitutional reform and now the ECB’s QE “taper.” These macro events have inflicted violent price corrections in government bonds but the longer term ramifications to specific risk assets – most notably bank stocks – may be bullish. The Eurozone’s deeply discounted banking sector – particularly Italy’s – offers investors potential entry points as the premium prices of safe havens are under pressure.

We believe the Eurozone’s banking sector discount will continue well into 2017. For the reasons outlined below, bearish bonds and bullish banks is a tactical asset allocation trade that investors may consider before the end of the year.

Chart 1 below shows how – underpinned by these macro events – the rise in interest rates since July has sharply reversed the downbeat sentiment in Eurozone bank stocks. Since July the EURO STOXX Banks index is up 37% and the yield of Europe’s safest save haven, the German Bund, rose 49 bps.

Past performance is not indicative of future performance

ECB’s QE taper - extend to shield against 2017 political riskdownside

The ECB’s language has become more upbeat, arguing a moderate but firming recovery in the Eurozone as a key driver for its decision to taper the monthly purchases from EUR 80bn down to EUR 60bn between March 2017 to at least December. If the extension works as a shock-absorber during renewed political uncertainty with next year’s general elections in France (in May), and Germany (in September) – then we believe bond markets should prepare for the lowered upper bound to come down after these elections in September. With pressure on investors to discriminate high grade debt in Europe more vigorously, we expect government bond yields to adjust higher and credit spreads to widen.

Trump win - reinvigorating to risk-on asset allocation shift

The upbeat expectations of US economic growth appear to have brushed aside the geopolitical uncertainties around Trump’s anti-transatlantic partnerships on trade and defence rhetoric. Trump’s win reverberated in European bond markets more forcefully than Europe’s own internal political strife. European government debt yields rose sharply in the days leading up to the US presidential election and, following Trump’s victory, settled 50 to 100 bps higher. If investors expecting Trump’s aggressive pro-growth agenda to improve fundamentals for the US economy, we believe the expectations of the Fed further tightening may raise credit risks in European sovereign debt where a low to no inflationary environment adds to the real interest burden, most notably of overextended countries such as Italy.

Trump has reawakened the risk-on asset allocation shift. In so doing bond yields globally have risen, and in Europe emerged out of zero/sub-zero territory. The ramifications of US-induced rising rates in Europe to banks’ loan and trading books we believe will potentially be a boost to the outlook of bank profitability. Banks can, in all likelihood, still refrain from charging deposit account holders additional fees and risk losing customers if they do, even while steepening yield curves revive opportunities for banks to engage in carry trades.

No referendum and Renzi resignation not cutting short Italian bank sentiment

Signs have emerged in Italy of a heightened sense of urgency to deal with bank restructuring before the caretaker government under Renzi dissolves for new elections next year.

Following its asset sale of Polish lender Pekao and of its investment arm Pioneer to be sold to Amundi, Unicredit has opened up an opportunity to warm investors for a EUR 13 billion capital raising to bolster its capital buffers, and in so doing alleviate concerns of systemic risk posed by Italy’s largest bank. The large upside potential, underpinned by the deeply discounted valuations with which Italian banks trade relative to peers elsewhere in Europe and broader equity market benchmarks, we believe will compel investors to react positively to the market-based solutions sought by Italy’s largest banks to restructure and recapitalise.
While not systemic but politically toxic, the fate of Banco Monte Dei Paschi Di Siena (BMPS) is likely to be an isolated event. It is readying itself for state support while preventing a political fallout through a plan that may revert to using deposit insurance as a means to limit the losses on retail investors holding significant exposure in BMP’s subordinated bonds, which – according to EU rules on bank rescues – must take losses before tax money is deployed to fund the bail-out. Whatever happens to BMPS, the markets have begun re-rating Unicredit and others regardless.

Bond market bearishness in the UK has been underscored by concerns over import-driven inflation fears following the plunge of the Sterling as a result of the Brexit vote earlier this year. The marked debased value of the Sterling is against a backdrop of debt-fuelled spending by households who, faced with likely much higher energy bills and transportation costs, could see their propensity to spend diminished. In that case the feedback loop is negative – slowing economic growth will translate into a weakening tax take for the Treasury. This at a time when it is preparing to unleash more deficit spending to soften the blow on the persisting uncertainties of the kind of trade model the UK seeks with the EU. So far it’s too early to see if Brexit has damaged trade, investment or growth. Going by the latest releases, the economy appears to be on a strong growth trajectory and sentiment is upbeat. The constant back and forth discussions of parties in Parliament over the when and how to leave the EU in an orderly fashion suggests the stakes are high enough to warrant the date for when Article 50 is triggered – currently planned for March 2017 – to be pushed out.

Conclusion

Political macro events have reinvigorated a risk-on asset allocation trade, most notably in Europe where the premium prices charged on government debt contrasts with deeply depressed valuations of bank stocks. That these dislocated valuations are beginning to unravel (close/reverse) between both asset classes are in response to ECB’s confidence in Eurozone’s path to sustainable recovery as it pairs back QE, and the urgency of seeking market solutions for bank restructuring ahead of any political outcome in Italy and Europe. Economics, more than politics, is trumping the sentiment in Europe’s financial markets. We believe investors should consider acting on the former accordingly.

This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, its officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.

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This website and its content has been provided by WisdomTree Europe Ltd which is an appointed representative of Mirabella Advisers LLP which is authorised and regulated by the Financial Conduct Authority.

The price of any Shares or the value of an investment in ETPs may go up or down and an investor may not get back the amount invested. Past performance is not a reliable indicator of future performance. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any financial instrument or product or to adopt any investment strategy.

For Professional Clients only. If you are not classified as either a Professional Client or Elective Professional Client. See client types here: Investor Types

If you are not classified under either of the other two categories, we will categorise you as a retail investor. You are welcome to view the contents of this website and to register your details so we have a record for the future, however currently we do not send materials directly to retail investors.